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Owner's Title Insurance.95% Buy It, 10% Know Why!

By
Real Estate Broker/Owner with Northern Virginia Homes - FRANKLY REAL ESTATE Inc
(This is a Virginia specific posting, Our Owner's policy sometimes cost 3 to 4x that of other states)
Owner's Title Insurance is OPTIONAL! That doesn't mean "don't get it", it means, "know what you are buying before/if you buy it."

    There are two types of Title Insurance when buying a house in Virginia.

  1. Lender's Title Insurance. REQUIRED
    This is a fixed price by the state and is required by your lender, so stop thinking about it. It is paid once at closing, it is NOT monthly.
    For a $400k loan, this comes to about $1,000.
    This is to protect the bank's investments (loan to you) from a problem with the title.

  2. Owner's Title Insurance. OPTIONAL
    This covers what the Lender's policy does not cover. Also a one time payment.
    You have 3 options:
    a) No coverage (rarely do people know this is an option!!)
    b) "Standard" policy. $700 (reissue rates are less, more below about that)
    c) "Premium" or "Alta" Policy. $1,000 ($500k house, $400k loan)

The OWNER'S TITLE policy will be the focus of this blog. This policy is 100% OPTIONAL.

90% to 95% of buyers buy the Owner's policy. I have no problem with this, however I would guess that 80% of people buying this have no idea what it is or that they even have an option. That I have a problem with.
    Why do people buy Owner's coverage?

  1. It is snuck into the the closing documents (HUD1) by default with NO mention of it being Optional. Sometimes the "premium" policy is put in by default. That really bugs me.

  2. It is sold as being a blanket coverage that protects you from everything and the fear of losing your house, and going bankrupt. I have yet to get any stats on how often this happens. 1 out of 100? 1 out of 10,000? Once in the USA every year? Or does the insurance cover the costs to cover the $500-$5,000 in legal fees to clear up the issue?

  3. It isn't disclosed that the title company selling you this insurance is making a 80% commission on selling you this policy.

  4. Realtors do not get a bonus for pushing this (thank God), but if a Realtor doesn't say "you must get it" they will be exposed to potential future liability. For example, if they sell 100 homes and they tell their client NOT to get it, and 1 has an issue, guess who they will sue? So it is easier for Realtors just to say "buy it." It doesn't cost them a dime. We like to say "Learn about it, and then decide."

I don't mind Title companies making money. What I don't like is the lack of disclosure. It is not clear to the buyer that this is optional and that most of the profits of the closing come from this. Not the token $200 "fee" they charge. They make their money from Title insurance.

    Again, I am not saying NOT to buy Owner's Title Insurance. I'm just saying:
  • Know what it is.
  • Who makes money if you buy it?
  • Are you getting the basic or premium?
  • Ask your Realtor or Title company for some statistics on how often these policies are engaged. (I've yet to get an answer for this one)


    Examples to ponder:
  1. The closing company pitches Owner's insurance as a nearly 100% coverage if something goes wrong with your title. However I spoke to a woman that had to sue her title company to get them to perform on her insurance. She put it this way... "I paid $1,000 for a policy, $800 goes to the closing company as a commission, $200 goes to the policy writer. For $200, how likely are you going to be protected from a $500,000 loss?"

  2. I was once at a closing in Falls Church. The buyer was a President of the Closing company. THE PRESIDENT OF A CLOSING COMPANY DID NOT BUY TITLE INSURANCE FOR HIS HOME. Keep in mind that he would effectively get a 80% discount and he STILL didn't find it necessary for his personal home. I asked him why he wasn't buying it and he said "I do the title search personally and I double checked and made sure there was nothing wrong with the Title history." Then he had the nerve to say "But you should bring your buyer clients here and make sure they do buy the Owner's policy." This made no sense to me. Was he not going to double check my client's Title history as well as his own personal search?

  3. Remember that you are buying the Lender's policy too. If something was hugely wrong with the title, wouldn't the Lender's policy kick in to clean things up (as in legal fees)? This part isn't clear to me. If the house is $500k and you put down $25k 5%), are you really paying to insure against $500k, or is it more of an insurance to protect the $25k you have put down?

    On the other hand...
  1. I have spoken to a Realtor that has been in business for 20 years and she says you would be nuts to not get the policy. She has seen first hand one person that would have had major trouble if they didn't buy the policy. Now does major trouble mean the loss of the house? All $500k or does it mean they would have had to pay $1,000 or $2,000 in legal fees. I would never pay $500 to insure against a 1 in XYZ chance of having to pay out $1,000. But I might pay $500 to cover $500,000 (if it really even covers you.)

  2. One of my favorite closing companies in Alexandria says that they use the Owner's title insurance all the time to clear up title problems that come up. So A buyer buys a house in 2002, and buys a policy. IN 2007 they sell th house but something pops up on the title. This company says that since the seller bought the policy, they were able to close. If they hadn't bought it... (it isn't clear if the alternative was a) losing the home (probably not), cover legal fees to clear it up c) ability to close immediately vs delaying closing weeks or maybe months (most likely)

Basic vs Premium
The Premium main feature is that it is supposed to protect you beyond your purchase price. So if your $500k house appreciates to $600k, the basic policy will protect your $500k while the premium protects $600k.

My wish list:
1) That Owner's Title Insurance would be renamed to "Owner's Title Insurance (Optional)", so that consumers would know they have a choice.

2) That I could find actual data on how often these policies are engaged. Are we talking 10% of the time? Once in 100,000? And of those what did it actually protect against. Consumers deserve to have this data.


    Dear Closing Companies, can somebody post a comment answering these few questions:
  1. Out of your last 1,000 deals, how many times did an owner's policy get engaged.
  2. Take the last 5, what would have happened to them if they didn't have a policy?
  3. What actual real life "worst case" (because that is how policies are sold) examples do you have of somebody NOT having the policy and being adversely affected by this? What did they lose? $500 in legal bills or a $500k house?

Again, I'm not saying to get the Owner's coverage or not. I don't care if you do. If it makes you sleep better at night, great, I won't be disappointed. I will be disappointed if you buy it blindly without understanding it.

Other little known tips:

1) Try and get a Reissue rate. If the former owner bought the property within the last 10 years, they probably have a policy. Track that down and save 20-30% on the Owner's portion of the Title insurance. If lost, the former closing company can send a fax for $25 to prove the insurance was purchased. Take that $300 in savings and use $10 and donate it to StBernardProject.org.

Conclusion
I am in NO WAY saying not to buy Owner's Title Insurance. I am not even implying it. I am just saying to make sure you know what you are getting. I prefer to give information instead of giving recommendations, but I can say that if you are at all uncomfortable waiving Owner's Title insurance, then you SHOULD get it so you can sleep well at night. This is not one of those, "when in doubt, don't get it" issues.

Here is a link comparing the standard policy versus the premium policy. I still don't think this is enough information to make an informed decision. Click for link to Owner's Title Policy Comparison chart. This sales sheet is obviously designed to make the premium policy look like it covers 5 times that of a standard policy.

75% of my clients end up getting the standard. Maybe a couple have bought the premium. I don't personally buy any Owner's title insurance, but that is just me, and NOT a recommendation.

Comments? Anybody use one of these policies?


- Written by Frank Borges LL0SA- Broker/Owner FranklyRealty.com
703-827-4006
More Blogging at Blog.FranklyRealty.com
Videos at YouTube.FranklyRealty.com
Keywords: Housing bubble? Arlington, Alexandria, mls, homes, Real estate, Virginia, Alexandria, 22201, 22314, Fairfax Va, DC Realty, Realtor

Comments (13)

Sean Purcell
CQ Financial Group - La Mesa, CA

Lot of great questions and issues Frank.  I especially like the reaction of the president of the closing company not buying owner's insurance because he double checked... but your clients should still buy it.  Kind of reminds me of the great and powerful Oz telling us to "pay no attention to the man behind the curtain".

The real issue here seems to be one that is debated quite a bit on this site: full disclosure.  There is so much money floating around that it often overpowers the fiduciary responsibility we are charged with when it comes to any aspect of a real estate transaction.  The clients are looking at each of us for expertise, direction and support on something they might do 2-3 times in their entire lives.  This is should be seen as a tremendous obligation rather than an easy opportunity to make more money.

Very well written post.  Thanks.

Jan 12, 2007 06:03 AM
Tim Maitski
Atlanta Communities Real Estate Brokerage - Atlanta, GA
Truth, Excellence and a Good Deal
Frank,  I too would like to know more about title insurance.  I'd love to be able to find ways to shop and save money on it.  I personally wouldn't buy a home without it but I hate not having an option to choose what company I buy it from.  In Georgia it's up to the closing attorney to decide.  Of course, they are probably going to go with the company that gives them the largest commission.
Jan 12, 2007 06:11 AM
Leigh Brown
Leigh Brown & Associates, RE/MAX Executive - Charlotte, NC
CEO, Dream Maker - Charlotte, NC
In my experience, the closing attorneys here in NC are selecting title insurance based on the best negotiated rates they can get.  Not necessarily on the commission they may or may not make.  Seeing as most people only do a very few real estate transactions in their lives, I agree that better disclosure would be good to explain this.  Hoping someone out there has some stats to share with all of us!  One of the things we ask sellers to provide is their title insurance policy, to save the buyer some money on title insurance since they can tack on to the existing policy. Every little bit helps.
Jan 12, 2007 06:21 AM
Home Design
Alpharetta, GA
Home Design and Real Estate
I never purchase owners title insurance and never recommend it to my clients who are doing 100% financing.  The premium is almost 90% profit for the closing attorney and Ins Company.  Last year I checked to see how many cases in GA were filed in relation to homes sold and I was astonished.  The stats were similiar to getting hit by lightning.  This is a secret the attorneys do not want you to know.  Now if you pay cash for the home or have a significant or put a significant amount down, I would buy it.
Jan 12, 2007 06:48 AM
Deborah Burns ~ Seattle Real Estate Agent
Realty Executives -BRIO - Seattle, WA

Wow what an eye opener this article was for me!  Thanks for raising questions that I will follow up with my Broker.  There is certinally a lot of "stuff' going on with fees and services (not just real estate commissions) that seems that the buyer/seller does not know about, and that agents only find out with a lot of experience.  I have been talking  recently with a few people (at different times) about agent training, and how imcomplete it is.  I have been a trainer before and it was my job to make sure the people I was training understood all asspects of the training.  I do not believe that most Brokers do that, it's likw "sink or swim".  I do have a Broker now who is doing a much better job of training new agents, but I still think there is a lot of room for improvement, especially from the corporate office. 

I hate having to re-create the wheel over and over again because of having do do so much trial and error (I am talking about things like marketing, business planning & development, etc. not just transactional).

Thanks for the information!

Jan 12, 2007 08:27 AM
Jeff Dowler, CRS
eXp Realty of California, Inc. - Carlsbad, CA
The Southern California Relocation Dude

Very good information, Frank. Title insurance confuses lots of buyers. Heck, it confused me for years before I got into the biz. And the point about it being optional is not always made clear to buyers, nor do they understand the implications of not having it.

The owner's insurance is particularly important where a home ahs been through a number of transactions (back east in boston we hade 100+ year old homes - image the title problems that could arise).

Jan 12, 2007 10:08 AM
ARDELL DellaLoggia
Better Properties Seattle - Kirkland, WA

Deborah, here in WA Owners Title is paid by seller, because they don't do full Title Searches here.  They do Owners Title "in lieu of" some of the longer chain of Title Search stuff.  Buyer's only pay for Lender's Title.  Seller's pay for Owner's Title  That is here where you and I sell real estate.

Jan 12, 2007 11:16 AM
Jennifer Fivelsdal
JFIVE Home Realty LLC | 845-758-6842|162 Deer Run Rd Red Hook NY 12571 - Rhinebeck, NY
Mid Hudson Valley real estate connection
Good information, I need to find out more about the requirement in NY.  I know the clients purchase it.  Thanks again.
Jan 12, 2007 12:29 PM
Rob Robinson- Lehigh Valley PA
Bertrum Settlements (Title & Abstract) - Allentown, PA

In PA, the INSURANCE is regulated

So the 'sell', is how FAST we can turn TC , (accurate is a given)......  and offer bi-lingual (spanish) 

 

Why is Title Ins, being banged in here?   I'm confuseed.  It's  not some cash cow IMO.

Jan 12, 2007 05:06 PM
Deborah Burns ~ Seattle Real Estate Agent
Realty Executives -BRIO - Seattle, WA
Ardell - thanks, I missed the notation at the top that said that the info was specific to Virgina, no wonder I had questions!
Jan 12, 2007 07:09 PM
Maggie Dokic /Indialantic | 321-252-8696
Magdalena Dokic - Indialantic, FL
Selling the beach in Florida's space coast
Frank you made some great points.  I am not sure whether the Owner's Policy is mandatory here in Florida, but now that I read your blog, I'm thinking it probably is not.  I'll have to find out for sure.  One thing's for sure.  It's been on every HUD-1 I've seen.
Jan 12, 2007 09:42 PM
Jim & Maria Hart
Brand Name Real Estate - Charleston, SC
Charleston, SC Real Estate
The owner's policy here in SC is also optional.  Every attorney our clients have used has either called and spoken with them or sent them a letter explaining the optional coverage.  The lender is required to get it, and most of our clients have paid for it as well.  We haven't run into any situations (yet) where they've needed it, but we only have a few years under our belts. 
Jan 13, 2007 05:25 AM
John Klassen
M & T Bank - Kingston, NY

Disclosure falls on the loan officer and the lender. Title companies are starting to get regulated like the rest of us. If you choose a reputable title company or attorney you'll be okay. I do agree with the disclosure end. Why does the loan officer have to explain and get blamed for everything.

 

Good post.

Jan 13, 2007 10:01 AM